Decoding Concurrent Audit Allotments

CA Amresh Vashisht

Concurrent Audit is an examination that is simultaneous with the happening of business transactions or is conceded out as near thereto as achievable. It’s an attempt by an independent person to shorten the interval between the occurrence of a transaction and its examination not involved in its documentation. This independent person is at large are Chartered accountants who are in practice in this country. The basic of this concurrence exercise revolve around substantive checking in key areas rather than test checking.

Banking Industry is carrying the consensus of concurrent audits since 1993 when the banking industry regulator felt its importance and directed the banks to go for the concurrent audits. Hence, this unique   system of concurrent audit in banks was introduced by the Reserve Bank of India (RBI) in October 1993 pursuant to the recommendations of the Ghosh Committee on Frauds and Malpractices in Banks. Since then, RBI has issued a number of circular impacting widely the scope and coverage of concurrent audit in banks. With the financial sector reforms as well as information and communication technology revolutions, the operational environment of the banks has also changed very fast. Thus present deregulation has opened up opportunities for banks to diversify into new areas like investment banking, gold banking, mortgage financing and depository services etc. We the Chartered Accountants are there for them to prove their operational efficiency and prudent risk management.

It is important to note, that apart from concurrent audit, members of the Institute are also engaged to carry out certain other types of audits as well in banks, such as: –

• Revenue Audit/Income-Expenditure Audit
• Stock and Debtors’ Audit
• Credit Audit
• Pre-Disbursement Audit
• Information System (IS) Audit
• Depository Participants Audit (DP Audit)

Normally Banks also have a system of inspection of branches by bank officials themselves. In addition, the RBI also conducts inspection of important branches and reviews activities of head offices of banks (called annual financial review). The scope of concurrent audit is determined, among other matters, by the respective banks within the broad framework of guidelines issued by the RBI. As these requirements vary for different types of banks, it is not possible to lay down a single set of guidelines which would act as a model to the task applicable to all banks having different size, spread and activities. Hence every bank is carrying their manuals at their own.

Different Banks maintain panel of chartered accountants at their H.O. level/or at L.H.O./Z.O. level for Concurrent Audit purposes. Chartered accountants may apply for empanelment on prescribed online formats. Moreover, the Reserve Bank of India has made the Concurrent Audit mandatory for all Urban Co-operative Banks (UCBs).

In 2009 , RBI revisited the concurrent audit portfolio and issued the guidelines on Internal Audit, Information Systems Audit and Concurrent Audit Systems. While the audit is essential for the health of the PSBs, It has been observed by RBI that there is a multiplicity of overlapping audits in the Public Sector Banks (PSBs) and these overlapping audits throughout the year engage a lot of attention, resources and time of the PSBs. It has also been observed that there is a need to revamp the audit system in PSBs in the wake of increasing computerization and shifting of operations on I.T. based system. It was also felt that the present audit system is lagging behind the technological advancement achieved by PSBs.

In the above background the Government of India has constituted a Committee under the Chairmanship of Shri Basant Seth, ex-CMD of Syndicate Bank which has submitted its report. The Committee has identified many areas of concern in the PSBs but stressed on that Multiplicity of Audits is resulting in Audit fatigue. It express a dire need to stream line the number of Audits by strengthening the Internal Audit and Concurrent Audits and felt immediate attention to rectify its present status where currently 70% of business of banks was covered under Concurrent Audit System and yet the irregularities / frauds could not be controlled. The committee also observed that the basic reason for the poor quality of work done by the Concurrent Auditors is on account of low fees structures and lopsided empanelment and appointment procedure followed by Banks. The Committee feels that there is urgent need to rectify the position in order to make the Concurrent Audit System effective. The committee also suggested that Statutory Branch Audit has become routine and not much effective post implementation of CBS in PSBs. In the light of the above areas of concern identified by the committee, it was felt by RBI to issue the guiding principles on Internal, I.S., Concurrent and Branch Statutory Audit and advised PSB to follow by all the PSBs after suitably adapting them to the need of their organization.

The appointment conditions of the statutory branch auditors in PSB twisted and given autonomy to banks that they may carried out for all branches with advances of 20 Crore & above and 1/5th of the remaining branches covering a representative cross section of rural /semi-urban /urban and metropolitan branches, predominantly including branches which are not subjected to concurrent audit, so as to cover 90% of advances of a bank. The regulator has clearly established to include those branches which are not under concurrent audit. In respect of branches below the cut-off point, which are subject to concurrent audit by chartered accountants, henceforth, LFARs and other certifications done earlier by SBAs were called upon to submit by the concurrent auditors and such branches may not generally be subject to statutory audit.

PSBs didn’t act over appointing the concurrent audits but applied the 20 Crore advance norms for Statutory Branch audits. From 2012, the bank has strictly followed this 20 Crore limit without visiting the concurrent audit appointments. This is to mention that in 2009, the regulator guidelines clearly mention that, the existing Branch Statutory Auditor appointment system shall be phased out, in view of the suggested guiding principles. It further suggested that all the branches not subjected to concurrent audit but covered under the Branch Statutory Audit, with the enhanced threshold limit of advances and 1/5th of remaining branches should be subjected to certification by external Chartered Accountants under Branch Statutory Audit System in the banks, where the CBS is not stabilized, for a maximum period of two years. However, in case of banks where the CBS is stabilized and running well, the certification as per the above norms should be done at central level by the Central Statutory Auditor. Now all PSB have stabilized and they are running well so certification shall be done by the central statutory auditor. The recent Govt. directive to give the power to bank management is to appoint the statutory Auditors of their choice questions the total mess up scene created in the last four/five years. The said guidelines also authorise PSBs that progressively, the threshold level of advances may be increased so that the number of branches to be taken up for statutory audit is phased down over a period of time.

So every stage is set to kill the branch statutory audit. This is the unique year as 60 % of the branch auditors who completed their 4 year term in the last 3 years have not got any offer from any bank. With this year completion, the banks are at safe side not to go ahead with the previous practice. It is quite interesting to note that our regulator, the premier institute of the country never raised their voice for setting aside 25% of auditors but with full energy added new firms in an annual gala function of MEF filing. This MEF has been used to polish the shattered image and to console the members of the institute who satisfy themselves seeing their names in a panel submitted by the ICAI to RBI.

In the month of December, PDC the operational department for filling the empanelment has come out with a final penal to be submitted to RBI. Since December the MEF site is having a note that the panel as submitted to RBI shall be coming shortly. Two months have passed, PDC got new guards but the empanelment never surfaced again. The fate of statutory bank branch auditors is hanging in air and shall be cleared in few days. How many of us shall be able to get an offer from the bank is a million dollar question?

The above mention aspect of RBI for Annual Certifications by concurrent auditors also suggested revising Fees of Concurrent Auditors. Even revision is to result in reduction in overall audit cost to the Banks. Very few PSB revised it but at large PSBs have not reviewed the fees fixed more than decades ago, although the volume of business has gone up manifold. Such rigidity conditions for the concurrent auditors spoil the very purpose of qualitative disposal of their work by chartered accountants. Undoubtedly the fee offered to the auditors is abysmally low. On an analysis of manpower cost for the job he is expected to perform, the per capita fee is invariably lower than minimum wages payable to an unskilled worker under the State Labour Acts/Shop & Establishment Acts. Although most banks insist on at least one qualified CA along with a non-qualified assistant, in some cases, the requirement is more with the visit of a partner at least once a week at the designated branches. All this translates to sharing a lower share between all those involved in the audit process. The firm is required to depute at least a chartered accountant to conduct the audit as per the terms of appointment and they offer fee of more or less Rs. 10,000 per month. It amounts to Rs. 333 per day for a qualified Chartered Accountant. As per PWD rates, an unskilled mason is paid higher wages. This is in line to a national survey conducted by Prime Academy, a Chennai based organization, that the fee paid to auditors averages around Rs. 1,600 per 10 Crore of turnovers. The CA firm’s are happy in accepting concurrent audit in such a lower fees is the main reason of downgrading the quality of concurrent audit. There is no question of small or big firms accepting the audit, all are in a queue and it seems that our CA firm conditions don’t permit us the courage of saying “NO”. Thus The major issue involved in this is the quality of concurrent audit rather than the fees, though it cannot be denied that if banks pay higher fees, they can demand and enforce better quality from the auditors by way of deputation of better professionals”. The issue needs to be urgently taken up with the ICAI and cost patterns should be prepared considering man-days and other aspects. In fact quality issues are bound to suffer with lower remuneration. Conventional audit patterns have changed and different audit techniques need to be implemented.

Now to subsidies their statutory branch auditors, a number of Banks are issuing the advertisement calling the applications for concurrent audit. No firm policy is in the offing. Every management is taking it to its own tune. When an application comes out, we mad fully spread the information to tender the application in a given deadlines. None of the bank has come out with an open policy of concurrent audits.CA Tarun Ghia , a central council member was Convener of ICAI Group on Equitable Distribution of audit opportunities, bank audit allotments, bank concurrent audit allotments, responses to tendering etc. It was his petition in 2006 on which he secured an order of the division bench comprising justice Rebello and justice VK Tahitian and it became mandatory for RBI and the institute to display on the website the names of the applicant chartered accountant firms, and the category of the firm. Surprisingly when he is in a council, the institute is not displaying the names of firms finally submitted to RBI in case of Statutory Branch auditors.

His group on equal distribution of audit assignments introduced the ceiling on number of concurrent audit of banks per firm and carried two main recommendations to council. First is that a proprietary concern be allowed to take up 1 bank branch concurrent audit at a time. However, if such proprietary concern has a full time paid CA. employee for a period of 12 months or more, immediately precedes the date of appointment as a concurrent auditor, then the proprietary concern be allowed to take one more branch concurrent audit per such paid CA. employee. However, at the time of renewal of a concurrent audit, the same criteria will be applicable as if it is a fresh audit.

The other recommendation was that in cases of partnership firms, the firm be allowed to take one concurrent audit per 2 partners of firm and not more than five concurrent audits on overall basis. However, at the time of renewal of a concurrent audit, the same criteria will be applicable as if it is a fresh audit. Central Council Meeting of the ICAI held on Nov. 20th and 21st , 2014 considered the recommendations of his group but rejected the recommendations when the voting took place and by a majority of thin line the decision came that the placing a ceiling is a must but the ceiling will be worked out by the Council as against what is recommended by the Group.

Many of the times, we don’t get the answers we sought. Often times, we have to take the answers we have given and trust that our interpretation of the answer is correct. We as auditors cannot escape our fate, but our path may be altered, potentially resulting in a different outcome. We may consider it divine intervention, or a miracle. Others consider it to be coincidence. In some cases both are true, but there are always exceptions. Here our fate as Banking Industry Auditors is hanging in the balance. One cannot escape their fate. But a sacrifice, no matter how small, can pave the path to conquer insurmountable odds, even Fate.

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